ORIGINAL PRONOUNCEMENTS

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1 Financial Accounting Standards Board ORIGINAL PRONOUNCEMENTS AS AMENDED Statement of Financial Accounting Standards No. 52 Foreign Currency Translation Copyright 2008 by Financial Accounting Standards Board. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Standards Board.

2 FAS52 Statement of Financial Accounting Standards No. 52 Foreign Currency Translation STATUS Issued: December 1981 Effective Date: For fiscal years beginning on or after December 15, 1982 Affects: Amends ARB 43, Chapter 12, paragraph 5 Deletes ARB 43, Chapter 12, paragraphs 7 and 10 through 22 Deletes APB 6, paragraph 18 Amends APB 22, paragraph 13 Supersedes FAS 1 Supersedes FAS 8 Supersedes FAS 20 Supersedes FIN 15 Supersedes FIN 17 Affected by: Paragraph 13 amended by FAS 130, paragraph 29 Paragraph 14A added by FAS 133, paragraph 527(a) Paragraphs 15, 16, 31(b), and 162 amended by FAS 133, paragraphs 527(b), 527(c), 527(g), and 527(h), respectively Paragraphs 17 through 19 deleted by FAS 133, paragraph 527(d) Paragraph 21 replaced by FAS 133, paragraph 527(e) Paragraphs 22 and 23 amended by FAS 96, paragraph 204, and FAS 109, paragraph 287 Paragraph 24 amended by FAS 96, paragraph 204; FAS 109, paragraph 287; and FAS 135, paragraph 4(l) Paragraphs 26, 31, 34, and 46 amended by FAS 135, paragraph 4(l) Paragraph 30 amended by FAS 133, paragraph 527(f), and FAS 161, paragraph 4 Paragraph 45 amended by FAS 154, paragraph C10 Paragraph 48 amended by FAS 96, paragraph 205(p); FAS 109, paragraph 288(r); and FAS 142, paragraph D6 Paragraph 101 effectively amended by FAS 141, paragraphs 44 through 46, and amended by FAS 141(R), paragraph E15 Other Interpretive Pronouncement: FIN 37 AICPAAccounting Standards Executive Committee (AcSEC) Related Pronouncement: SOP 93-4 Issued Discussed by FASB Emerging Issues Task Force (EITF) Affects: No EITF Issues Interpreted by: Paragraph 11 interpreted by EITF Topic No. D-55 Paragraph 13 interpreted by EITF Issue No Paragraph 15 interpreted by EITF Issue No Paragraph 21 interpreted by EITF Issue No Paragraph 26 interpreted by EITF Topic No. D-12 Paragraph 46 interpreted by EITF Issues No and 92-8 and Topic No. D-56 Related Issues: EITF Issues No , 88-18, and and Topics No. D-4 and D-71 FAS52 1

3 FAS52 FASB Statement of Standards SUMMARY Application of this Statement will affect financial reporting of most companies operating in foreign countries. The differing operating and economic characteristics of varied types of foreign operations will be distinguished in accounting for them. Adjustments for currency exchange rate changes are excluded from net income for those fluctuations that do not impact cash flows and are included for those that do. The requirements reflect these general conclusions: The economic effects of an exchange rate change on an operation that is relatively self-contained and integrated within a foreign country relate to the net investment in that operation. Translation adjustments that arise from consolidating that foreign operation do not impact cash flows and are not included in net income. The economic effects of an exchange rate change on a foreign operation that is an extension of the parent s domestic operations relate to individual assets and liabilities and impact the parent s cash flows directly. Accordingly, the exchange gains and losses in such an operation are included in net income. Contracts, transactions, or balances that are, in fact, effective hedges of foreign exchange risk will be accounted for as hedges without regard to their form. More specifically, this Statement replaces FASB Statement No. 8, Accounting for the Translation of Foreign Currency Transactions and Foreign Currency Financial Statements, and revises the existing accounting and reporting requirements for translation of foreign currency transactions and foreign currency financial statements. It presents standards for foreign currency translation that are designed to (1) provide information that is generally compatible with the expected economic effects of a rate change on an enterprise s cash flows and equity and (2) reflect in consolidated statements the financial results and relationships as measured in the primary currency in which each entity conducts its business (referred to as its functional currency ). An entity s functional currency is the currency of the primary economic environment in which that entity operates. The functional currency can be the dollar or a foreign currency depending on the facts. Normally, it will be the currency of the economic environment in which cash is generated and expended by the entity. An entity can be any form of operation, including a subsidiary, division, branch, or joint venture. The Statement provides guidance for this key determination in which management s judgment is essential in assessing the facts. A currency in a highly inflationary environment (3-year inflation rate of approximately 100 percent or more) is not considered stable enough to serve as a functional currency and the more stable currency of the reporting parent is to be used instead. The functional currency translation approach adopted in this statement encompasses: a. Identifying the functional currency of the entity s economic environment b. Measuring all elements of the financial statements in the functional currency c. Using the current exchange rate for translation from the functional currency to the reporting currency, if they are different d. Distinguishing the economic impact of changes in exchange rates on a net investment from the impact of such changes on individual assets and liabilities that are receivable or payable in currencies other than the functional currency. Translation adjustments are an inherent result of the process of translating a foreign entity s financial statements from the functional currency to U.S. dollars. Translation adjustments are not included in determining net income for the period but are disclosed and accumulated in a separate component of consolidated equity until sale or until complete or substantially complete liquidation of the net investment in the foreign entity takes place. Transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency (for example, a U.S. company may borrow Swiss francs or a French subsidiary may have a receivable denominated in kroner from a Danish customer). Gains and losses on those foreign currency transactions are generally included in determining net income for the period in which exchange rates change unless the transaction hedges a foreign currency commitment or a net investment in a foreign entity. Intercompany transactions of a long-term investment nature are considered part of a parent s net investment and hence do not give rise to gains or losses. FAS52 2

4 Foreign Currency Translation FAS52 Statement of Financial Accounting Standards No. 52 Foreign Currency Translation CONTENTS Paragraph Numbers Introduction Standards of Financial Accounting and Reporting: Objectives of Translation... 4 The Functional Currency The Functional Currency in Highly Inflationary Economies Translation of Foreign Currency Statements Foreign Currency Transactions... 14A 16 Forward Exchange Contracts [Deleted] Transaction Gains and Losses to Be Excluded from Determination of Net Income Hedges of Firm Commitments Income Tax Consequences of Rate Changes Elimination of Intercompany Profits Exchange Rates Use of Averages or Other Methods of Approximation Disclosure Effective Date and Transition Appendix A: Determination of the Functional Currency Appendix B: Remeasurement of the Books of Record into the Functional Currency Appendix C: Basis for Conclusions Appendix D: Background Information Appendix E: Glossary INTRODUCTION 1. FASB Statement No. 8, Accounting for the Translation of Foreign Currency Transactions and Foreign Currency Financial Statements, was issued in October 1975 and was effective for fiscal years that began on or after January 1, In May 1978, the Board issued an invitation for public comment on Statements 1 12, each of which had been in effect for at least two years. Foreign currency translation* was the subject of most of the comments received. In January 1979, the Board added to its agenda a project to reconsider Statement 8. This Statement is the result of that project. 2. This Statement establishes revised standards of financial accounting and reporting for foreign currency transactions in financial statements of a reporting enterprise (hereinafter, enterprise). It also revises the standards for translating foreign currency financial statements (hereinafter, foreign currency statements) that are incorporated in the financial statements of an enterprise by consolidation, combination, or the equity method of accounting. Translation of financial statements from one currency to another for purposes other than consolidation, combination, or the equity method is beyond the scope of this Statement. For example, this Statement does not cover translation of the financial statements of an enterprise from its reporting currency into another currency for the convenience of readers accustomed to that other currency. 3. This Statement supersedes FASB Statement No. 8, Accounting for the Translation of Foreign *Terms defined in the glossary (Appendix E) are in boldface type the first time they appear in this Statement. FAS52 3

5 FAS52 FASB Statement of Standards Currency Transactions and Foreign Currency Financial Statements, 1 FASB Statement No. 20, Accounting for Forward Exchange Contracts, FASB Interpretation No. 15, Translation of Unamortized Policy Acquisition Costs by a Stock Life Insurance Company, and FASB Interpretation No. 17, Applying the Lower of Cost or Market Rule in Translated Financial Statements. STANDARDS OF FINANCIALACCOUNTING AND REPORTING Objectives of Translation 4. Financial statements are intended to present information in financial terms about the performance, financial position, and cash flows of an enterprise. For this purpose, the financial statements of separate entities within an enterprise, which may exist and operate in different economic and currency environments, are consolidated and presented as though they were the financial statements of a single enterprise. Because it is not possible to combine, add, or subtract measurements expressed in different currencies, it is necessary to translate into a single reporting currency 2 those assets, liabilities, revenues, expenses, gains, and losses that are measured or denominated in a foreign currency. 3 However, the unity presented by such translation does not alter the underlying significance of the results and relationships of the constituent parts of the enterprise. It is only through the effective operation of its constituent parts that the enterprise as a whole is able to achieve its purpose. Accordingly, the translation of the financial statements of each component entity of an enterprise should accomplish the following objectives: a. Provide information that is generally compatible with the expected economic effects of a rate change on an enterprise s cash flows and equity b. Reflect in consolidated statements the financial results and relationships of the individual consolidated entities as measured in their functional currencies in conformity with U.S. generally accepted accounting principles. The Functional Currency 5. The assets, liabilities, and operations of a foreign entity shall be measured using the functional currency of that entity. An entity s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. Appendix A provides guidance for determination of the functional currency. The economic factors cited in Appendix A, and possibly others, should be considered both individually and collectively when determining the functional currency. 6. For an entity with operations that are relatively self-contained and integrated within a particular country, the functional currency generally would be the currency of that country. However, a foreign entity s functional currency might not be the currency of the country in which the entity is located. For example, the parent s currency generally would be the functional currency for foreign operations that are a direct and integral component or extension of the parent company s operations. 7. An entity might have more than one distinct and separable operation, such as a division or branch, in 1 The following pronouncements, which were superseded or amended by Statement 8, are also superseded or amended by this Statement: paragraphs 7 and of Chapter 12, Foreign Operations and Foreign Exchange, ofarb No. 43; paragraph 18 ofapb Opinion No. 6, Status of Accounting Research Bulletins; and FASB Statement No. 1, Disclosure of Foreign Currency Translation Information. The last sentence of paragraph 5 of ARB 43, Chapter 12, is amended to delete and they should be reserved against to the extent that their realization in dollars appears to be doubtful, and paragraph 13 of APB Opinion No. 22, Disclosure of Accounting Policies, is amended to delete translation of foreign currencies as an example of disclosure commonly required with respect to accounting policies. 2 For convenience, this Statement assumes that the enterprise uses the U.S. dollar (dollar) as its reporting currency. However, a currency other than the dollar may be the reporting currency in financial statements that are prepared in conformity with U.S. generally accepted accounting principles. For example, a foreign enterprise may report in its local currency in conformity with U.S. generally accepted accounting principles. If so, the requirements of this Statement apply. 3 To measure in foreign currency is to quantify an attribute of an item in a unit of currency other than the reporting currency. Assets and liabilities are denominated in a foreign currency if their amounts are fixed in terms of that foreign currency regardless of exchange rate changes. An asset or liability may be both measured and denominated in one currency, or it may be measured in one currency and denominated in another. To illustrate: Two foreign branches of a U.S. company, one Swiss and one German, purchase identical assets on credit from a Swiss vendor at identical prices stated in Swiss francs. The German branch measures the cost (an attribute) of that asset in German marks. Although the corresponding liability is also measured in marks, it remains denominated in Swiss francs since the liability must be settled in a specified number of Swiss francs. The Swiss branch measures the asset and liability in Swiss francs. Its liability is both measured and denominated in Swiss francs. Although assets and liabilities can be measured in various currencies, rights to receive or obligations to pay fixed amounts of a currency are, by definition, denominated in that currency. FAS52 4

6 Foreign Currency Translation FAS52 which case each operation may be considered a separate entity. If those operations are conducted in different economic environments, they might have different functional currencies. 8. The functional currency (or currencies) of an entity is basically a matter of fact, but in some instances the observable facts will not clearly identify a single functional currency. For example, if a foreign entity conducts significant amounts of business in two or more currencies, the functional currency might not be clearly identifiable. In those instances, the economic facts and circumstances pertaining to a particular foreign operation shall be assessed in relation to the Board s stated objectives for foreign currency translation (paragraph 4). Management s judgment will be required to determine the functional currency in which financial results and relationships are measured with the greatest degree of relevance and reliability. 9. Once the functional currency for a foreign entity is determined, that determination shall be used consistently unless significant changes in economic facts and circumstances indicate clearly that the functional currency has changed. Previously issued financial statements shall not be restated for any change in the functional currency. 10. If an entity s books of record are not maintained in its functional currency, remeasurement into the functional currency is required. That remeasurement is required before translation into the reporting currency. If a foreign entity s functional currency is the reporting currency, remeasurement into the reporting currency obviates translation. The remeasurement process is intended to produce the same result as if the entity s books of record had been maintained in the functional currency. The remeasurement of and subsequent accounting for transactions denominated in a currency other than the functional currency shall be in accordance with the requirements of this Statement (paragraphs 15 and 16). Appendix B provides guidance for remeasurement into the functional currency. The Functional Currency in Highly Inflationary Economies 11. The financial statements of a foreign entity in a highly inflationary economy shall be remeasured as if the functional currency were the reporting currency. Accordingly, the financial statements of those entities shall be remeasured into the reporting currency according to the requirements of paragraph 10. For the purposes of this requirement, a highly inflationary economy is one that has cumulative inflation of approximately 100 percent or more over a 3-year period. Translation of Foreign Currency Statements 12. All elements of financial statements shall be translated by using a current exchange rate. For assets and liabilities, the exchange rate at the balance sheet date shall be used. For revenues, expenses, gains, and losses, the exchange rate at the dates on which those elements are recognized shall be used. Because translation at the exchange rates at the dates the numerous revenues, expenses, gains, and losses are recognized is generally impractical, an appropriately weighted average exchange rate for the period may be used to translate those elements. 13. If an entity s functional currency is a foreign currency, translation adjustments result from the process of translating that entity s financial statements into the reporting currency. Translation adjustments shall not be included in determining net income but shall be reported in other comprehensive income. 14. Upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity, the amount attributable to that entity and accumulated in the translation adjustment component of equity shall be removed from the separate component of equity and shall be reported as part of the gain or loss on sale or liquidation of the investment for the period during which the sale or liquidation occurs. Foreign Currency Transactions 14A. FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, addresses the accounting for freestanding foreign currency derivatives and certain foreign currency derivatives embedded in other instruments. This Statement does not address the accounting for derivative instruments. FAS Foreign currency transactions are transactions denominated in a currency other than the entity s functional currency. Foreign currency transactions may produce receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the

7 FAS52 FASB Statement of Standards expected amount of functional currency cash flows upon settlement of the transaction. That increase or decrease in expected functional currency cash flows is a foreign currency transaction gain or loss that generally shall be included in determining net income for the period in which the exchange rate changes. Likewise, a transaction gain or loss (measured from the transaction date or the most recent intervening balance sheet date, whichever is later) realized upon settlement of a foreign currency transaction generally shall be included in determining net income for the period in which the transaction is settled. The exceptions to this requirement for inclusion in net income of transaction gains and losses are set forth in paragraph 20 and pertain to certain intercompany transactions and to transactions that are designated as, and effective as, economic hedges of net investments. 16. For other than derivative instruments (Statement 133), the following shall apply to all foreign currency transactions of an enterprise and its investees: a. At the date the transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction shall be measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect at that date (paragraphs 26 28). b. At each balance sheet date, recorded balances that are denominated in a currency other than the functional currency of the recording entity shall be adjusted to reflect the current exchange rate [These paragraphs have been deleted. See Status page.] Transaction Gains and Losses to Be Excluded from Determination of Net Income 20. Gains and losses on the following foreign currency transactions shall not be included in determining net income but shall be reported in the same manner as translation adjustments (paragraph 13): a. Foreign currency transactions that are designated as, and are effective as, economic hedges of a net investment in a foreign entity, commencing as of the designation date b. Intercompany foreign currency transactions that are of a long-term-investment nature (that is, settlement is not planned or anticipated in the foreseeable future), when the entities to the transaction are consolidated, combined, or accounted for by the equity method in the reporting enterprise s financial statements. Hedges of Firm Commitments 21. The accounting for a gain or loss on a foreign currency transaction that is intended to hedge an identifiable foreign currency commitment (for example, an agreement to purchase or sell equipment) is addressed by paragraph 37 of Statement 133. Income Tax Consequences of Rate Changes 22. Interperiod tax allocation is required in accordance with FASB Statement No. 109, Accounting for Income Taxes, if taxable exchange gains or taxdeductible exchange losses resulting from an entity s foreign currency transactions are included in net income in a different period for financial statement purposes from that for tax purposes. 23. Translation adjustments shall be accounted for in the same way as temporary differences under the provisions of Statement 109 [and] APB Opinion 23. APB Opinion No. 23, Accounting for Income Taxes Special Areas, provides that deferred taxes shall not be provided for unremitted earnings of a subsidiary in certain instances; in those instances, deferred taxes shall not be provided on translation adjustments. 24. Statement 109 requires income tax expense to be allocated among income before extraordinary items, extraordinary items, adjustments of prior periods (or of the opening balance of retained earnings), and direct entries to other equity accounts. Some transaction gains and losses and all translation adjustments are reported in other comprehensive income. Any income taxes related to those transaction gains and losses and translation adjustments shall be allocated to other comprehensive income. Elimination of Intercompany Profits 25. The elimination of intercompany profits that are attributable to sales or other transfers between entities that are consolidated, combined, or accounted for by the equity method in the enterprise s financial statements shall be based on the exchange rates at the dates of the sales or transfers. The use of reasonable approximations or averages is permitted. Exchange Rates FAS The exchange rate is the ratio between a unit of one currency and the amount of another currency for which that unit can be exchanged at a particular time.

8 Foreign Currency Translation FAS52 If exchangeability between two currencies is temporarily lacking at the transaction date or balance sheet date, the first subsequent rate at which exchanges could be made shall be used for purposes of this Statement. If the lack of exchangeability is other than temporary, the propriety of consolidating, combining, or accounting for the foreign operation by the equity method in the financial statements of the enterprise shall be carefully considered. 27. The exchange rates to be used for translation of foreign currency transactions and foreign currency statements are as follows: a. Foreign Currency Transactions The applicable rate at which a particular transaction could be settled at the transaction date shall be used to translate and record the transaction. At a subsequent balance sheet date, the current rate is that rate at which the related receivable or payable could be settled at that date. b. Foreign Currency Statements In the absence of unusual circumstances, the rate applicable to conversion of a currency for purposes of dividend remittances shall be used to translate foreign currency statements If a foreign entity whose balance sheet date differs from that of the enterprise is consolidated or combined with or accounted for by the equity method in the financial statements of the enterprise, the current rate is the rate in effect at the foreign entity s balance sheet date for purposes of applying the requirements of this Statement to that foreign entity. Use of Averages or Other Methods of Approximation 29. Literal application of the standards in this Statement might require a degree of detail in record keeping and computations that could be burdensome as well as unnecessary to produce reasonable approximations of the results. Accordingly, it is acceptable to use averages or other methods of approximation. For example, the propriety of using average rates to translate revenue and expense amounts is noted in paragraph 12. Likewise, the use of other time- and effort-saving methods to approximate the results of detailed calculations is permitted. Disclosure 30. The aggregate transaction gain or loss included in determining net income for the period shall be disclosed in the financial statements or notes thereto. Certain enterprises, primarily banks, are dealers in foreign exchange. Although certain gains or losses from dealer transactions may fit the definition of transaction gains or losses in this Statement, they may be disclosed as dealer gains or losses rather than as transaction gains or losses. 31. An analysis of the changes during the period in the accumulated amount of translation adjustments reported in equity shall be provided in a separate financial statement, in notes to the financial statements, or as part of a statement of changes in equity. At a minimum, the analysis shall disclose: a. Beginning and ending amount of cumulative translation adjustments b. The aggregate adjustment for the period resulting from translation adjustments (paragraph 13) and gains and losses from certain hedges and intercompany balances (paragraph 20) (Paragraph 45(c) of Statement 133 specifies additional disclosures for instruments designated as hedges of the foreign currency exposure of a net investment in a foreign operation.) c. The amount of income taxes for the period allocated to translation adjustments (paragraph 24) d. The amounts transferred from cumulative translation adjustments and included in determining net income for the period as a result of the sale or complete or substantially complete liquidation of an investment in a foreign entity (paragraph 14). 32. An enterprise s financial statements shall not be adjusted for a rate change that occurs after the date of the enterprise s financial statements or after the date of the foreign currency statements of a foreign entity if they are consolidated, combined, or accounted for by the equity method in the financial statements of the enterprise. However, disclosure of the rate change and its effects on unsettled balances pertaining to foreign currency transactions, if significant, may be necessary. 4 If unsettled intercompany transactions are subject to and translated using preference or penalty rates, translation of foreign currency statements at the rate applicable to dividend remittances may cause a difference between intercompany receivables and payables. Until that difference is eliminated by settlement of the intercompany transaction, the difference shall be treated as a receivable or payable in the enterprise s financial statements. FAS52 7

9 FAS52 FASB Statement of Standards Effective Date and Transition 33. This Statement shall be effective for fiscal years beginning on or after December 15, 1982, although earlier application is encouraged. The initial application of this Statement shall be as of the beginning of an enterprise s fiscal year. Financial statements for fiscal years before the effective date, and financial summaries or other data derived therefrom, may be restated to conform to the provisions of paragraphs 5 29 of this Statement. In the year that this Statement is first applied, the financial statements shall disclose the nature of any restatement and its effect on income before extraordinary items, net income, and related per-share amounts for each fiscal year restated. If the prior year is not restated, disclosure of income before extraordinary items and net income for the prior year computed on a pro forma basis is permitted. 34. The effect of translating all of a foreign entity s assets and liabilities from a foreign functional currency into the reporting currency at the current exchange rate as of the beginning of the year for which this Statement is first applied shall be reported in other comprehensive income. The effect of remeasuring a foreign entity s deferred income taxes and life insurance policy acquisition costs at the current exchange rate (paragraph 54) as of the beginning of the year for which this Statement is first applied shall be reported as an adjustment of the opening balance of retained earnings. 35. Amounts deferred on forward contracts that (a) under Statement 8 were accounted for as hedges of identifiable foreign currency commitments to receive proceeds from the use or sale of nonmonetary assets translated at historical rates, and (b) are canceled at the time this Statement is first applied, shall be included in the opening balance of the cumulative translation adjustments component of equity up to the amount of the offsetting adjustment attributable to those nonmonetary assets. The provisions of this Statement need not be applied to immaterial items. 36. Financial statements for periods beginning on or after the effective date of this Statement shall include the disclosures specified by paragraphs To the extent practicable, those disclosures shall also be included in financial statements for earlier periods that have been restated pursuant to paragraph Financial statements of enterprises that first adopt this standard for fiscal years ending on or before March 31, 1982 shall disclose the effect of adopting the new standard on income before extraordinary items, net income, and related per-share amounts for the year of the change. Those disclosures are not required for financial statements of enterprises that first adopt this standard for subsequent fiscal years. 38. The Board expects to issue an Exposure Draft proposing an amendment of FASB Statement No. 33, Financial Reporting and Changing Prices, to be consistent with the functional currency approach to foreign currency translation. Prior to issuance of a final amendment of Statement 33, enterprises that adopt this Statement and that are subject to the requirements of Statement 33 shall have either of the following options: a. They may prepare the supplementary information based on this Statement and on the proposed amendment of Statement 33. b. They may prepare the supplementary information based on the application of Statement 8 and on the provisions of existing Statement 33. (Under this option, historical cost information based on the application of Statement 8 shall be presented in the supplementary information for comparison with the constant dollar and current cost information.) Enterprises that would become subject to the requirements of Statement 33 as a result of adopting this Statement are exempt from the requirements of Statement 33 until the effective date of this Statement. This Statement was adopted by the affırmative votes of four members of the Financial Accounting Standards Board. Messrs. Block, Kirk, and Morgan dissented. Messrs. Block, Kirk, and Morgan dissent to the issuance of this Statement. They start from a premise different from that underlying this Statement. They believe that more meaningful consolidated results are FAS52 8

10 Foreign Currency Translation FAS52 attained by measuring costs, cost recovery, and exchange risk from a dollar perspective rather than from multiple functional currency perspectives. Accordingly, the dissenters do not believe that this Statement improves financial reporting. In their opinion, improved financial reporting would have resulted from an approach that: a. Adopted objectives of translation that retained the concept of a single consolidated entity and a single unit of measure (that is, all elements of U.S. consolidated financial statements would be measured in dollars rather than multiple functional currencies) b. Avoided creating direct entries to equity c. Essentially retained Statement 8 s translation method, with an exception being translation of locally sourced inventory at the current rate d. Recognized all gains and losses in net income (that is, no separate and different accounting for transaction gains or losses and translation adjustments), but allowed for a separate and distinct presentation of those gains and losses within the income statement e. Recognized additional contractual arrangements (for example, operating leases and take-or-pay contracts) that effectively hedged an exposed net monetary liability position. The dissenters recognize that such an approach would not satisfy all of the critics of Statement 8, but they believe it would have avoided the more farreaching implications of the functional currency theory. They acknowledge that translating certain inventories at current rates departs from historical cost in dollars. However, they would accept that departure on pragmatic grounds as part of a solution to an exceedingly difficult problem. As further discussed in subsequent paragraphs, the dissenting Board members do not support this Statement because in their opinion it: a. Builds on two incompatible premises and, as a result, produces anomalies and a significant but unwarranted reporting distinction between transaction gains and losses and translation adjustments b. Adopts objectives and methods that are at variance with fundamental concepts that underlie present financial reporting c. Incorrectly assumes that an aggregation of the results of foreign operations measured in functional currencies and expressed in dollars, rather than consolidated results measured in dollars, assists U.S. investors and creditors in assessing future cash flows to them d. Will not result in similar accounting for similar circumstances. Incompatibility of Underlying Premises The standards for translating foreign currency financial statements set forth in this Statement stem from two premises that are incompatible with each other. The first premise is that it is a parent company s net investment in a foreign operation that is subject to exchange rate risk rather than the foreign operation s individual assets and liabilities. The second premise is that translation should retain the relationships in foreign currency financial statements as measured by the functional currency. The premise of a parent company s exposed net investment reflects a dollar perspective of exchange rate risk, and that calls for a dollar measure of the effects of exchange rate changes. The premise of retaining the relationships of measurements in functional currency financial statements calls for a functional currency measure of the effects of exchange rate changes. The dissenting Board members note that although the translation process can retain certain intraperiod relationships reported in functional currency financial statements, it cannot retain interperiod functional currency relationships when exchange rates change. Further, when an exchange rate changes between the dollar and a foreign currency, the value of any holdings of that currency changes and, from a dollar perspective, the resulting gain or loss is either real, or unreal, in its entirety. However, to implement the functional currency perspective, the standards result in a division of that gain or loss into two components. One is considered in measuring consolidated net income and the other is considered a translation adjustment. Thus, the standards require a transaction gain in income on a foreign operation s holdings of a third currency when that currency strengthens in relation to the functional currency, even if the third currency has weakened in terms of dollars. That gain will be reported in consolidated net income despite the fact that it does not exist in dollar terms and can never provide increased dollar cash flows to U.S. investors and creditors. The standards inherently recognize that fact by requiring a compensating debit translation adjustment. (Examples that further illustrate these concerns are contained in paragraphs of the August 28, 1980 Exposure Draft, Foreign Currency Translation.) FAS52 9

11 FAS52 FASB Statement of Standards The dissenters believe that the need for a translation adjustment that adjusts consolidated equity to the same amount as would have resulted had all foreign currency transactions of foreign operations been measured in dollars demonstrates the incompatibility of the two underlying premises. They believe that incompatibility is further demonstrated by the differing views of the nature of translation adjustments described in paragraphs 113 and 114. In the dissenters opinion, translation adjustments are, from a dollar perspective, gains and losses as defined in FASB Concepts Statement No. 3, Elements of Financial Statements of Business Enterprises, which should be reported in net income when exchange rates change. The dissenters believe that from a functional currency perspective, translation adjustments fail to meet any definition of an element of financial statements because they do not exist in terms of functional currency cash flows. Relationship to Preexisting Fundamental Concepts FAS52 10 The dissenters believe the two premises underlying this Statement (discussed above) challenge and reject the dollar perspective that underlies existing theories of historical cost and capital maintenance, inflation accounting, consolidation, and realization. The rejection of the dollar perspective has ramifications far beyond this project and was unnecessary in a translation project. While not explicitly stated, today s accounting model includes the capital maintenance concept that income of a consolidated U.S. entity exists only after recovery of historical cost measured in dollars. For example, prior to this Statement, the gain on the sale by a foreign operation of an internationally priced inventory item or a marketable security would have been measured by comparing the dollar equivalent sales price with the fixed dollar equivalent historical cost of the item. This Statement changes that. It remeasures the dollar equivalent cost while the item is held (measured by changes in the exchange rate between the foreign currency and the dollar) and treats that remeasurement as a translation adjustment, seldom if ever to be reported in net income. Under this Statement, consolidated net income, although expressed in dollars, does not represent the measure of income after maintaining capital measured in dollars. The dissenters believe that U.S. investors and creditors decisions are based on a dollar perspective of capital maintenance. Not only does this Statement change income measurement and capital maintenance concepts in the primary financial statements but it also implies the need to modify the measurement of changes in current costs (sometimes referred to as holding gains or losses) in Statement 33 and, likewise, to change that Statement s requirements for constant dollar accounting to constant functional currency accounting. This Statement abandons the long-standing principle that consolidated results should be measured from a single perspective rather than multiple perspectives. The dissenters believe (for the reasons set forth in paragraphs of Statement 8) that a single perspective is essential for (a) valid addition and subtraction in the measurement of financial position and periodic net income and (b) the understandability and representational faithfulness of consolidated results presented in dollars and described as being prepared on the historical cost basis. The dissenters believe that readers of financial statements are better served by having consolidated financial statements prepared in terms of a common benchmark a single unit of measure. This means to the dissenters that the translation process is one of remeasurement of the individual items of foreign financial statements (not net investments) into dollars much in the same way as Statement 33 presently requires a remeasurement of individual items of financial statements (not net investments) from nominal dollar measures into constant dollars. The Statement introduces a concept of realization (paragraphs 71, 111, 117, and 119) different from any previously applied in consolidated financial statements. It requires the results of foreign operations to be measured in various functional currencies and then translated into dollars and included in consolidated net income. It defers recognizing in net income the effects of exchange rate changes from a dollar perspective on the individual assets and liabilities of those same foreign operations until an indefinite future period that will almost always be beyond the point in time that those individual assets and liabilities have ceased to exist. As a result, the dollar effects of a rate change on current operating revenues are recognized when they occur by reporting in the translated income statement an increased or decreased dollar equivalent for those revenues versus the dollar equivalent of identical revenues generated before the rate change. However, the effects of the same rate change on the uncollected receivables from those previous revenue transactions are not included in net income until liquidation of the foreign operation. By not recognizing in net income the effects of exchange rate changes on existing receivables, this Statement

12 Foreign Currency Translation FAS52 results in sales denominated in a foreign currency being accounted for as if they had been denominated in dollars. That result is a focal point of the criticism made in this Statement (paragraph 75) about Statement 8. However, unlike this Statement, Statement 8 recognized that foreign currency sales are not denominated in dollars and therefore it required that the effects of exchange rate changes on all foreign currency denominated receivables be recognized in net income. To do otherwise places the enterprise in the anomalous position of having recognized the entire effect of the rate change on a current transaction while holding in suspense its effect on a previous transaction until liquidation of the foreign operation. This Statement accepts the use of the Statement 8 methodology (that is, using the dollar as the functional currency) for some foreign operations (including all operations in highly inflationary economies), but at the same time criticizes that methodology. It asserts that the Statement 8 methodology results in accounting as if all transactions were conducted in the economic environment of the United States and in dollars (paragraphs 74, 75, and 86). The dissenters believe such views were convincingly rebutted in paragraphs 94 and 95 of Statement 8, as follows: Some respondents to the Exposure Draft criticized that objective as an attempt to account for local and foreign currency transactions of foreign operations as if they were dollar transactions or, to a few respondents, as if they were dollar transactions in the United States. In the Board s judgment, those criticisms are not valid. Neither the objective nor the procedures to accomplish it change the denomination of a transaction or the environment in which it occurs. The procedures adopted by the Board are consistent with the purpose of consolidated financial statements. The foreign currency transactions of an enterprise and the local and foreign currency transactions of its foreign operations are translated and accounted for as transactions of a single enterprise. The denomination of transactions and the location of assets are not changed; however, the separate corporate identities within the consolidated group are ignored. Translation procedures are merely a means of remeasuring in dollars amounts that are denominated or originally measured in foreign currency. That is, the procedures do not attempt to simulate what the cost of a foreign plant would have been had it been located in the United States; instead, they recognize the FAS52 11 factors that determined the plant s cost in the foreign location and express that cost in dollars. If translation procedures were capable of changing the denomination of an asset or liability from foreign currency to dollars, no exchange risk would be present. Effects on Cash Flow Assessments The dissenters believe that U.S. investors and creditors should be provided with information about a multinational enterprise s performance measured in dollars because that is the currency in which, ultimately, the enterprise makes cash payments to them. Foreign exchange exposure to a U.S. investor or creditor is the exposure to increased or decreased potential dollar cash flows caused by changes in exchange rates between foreign currencies and the dollar. Changes in exchange rates between two foreign currencies are not relevant, except to the extent that each such foreign currency s exchange rate for the dollar changes. Supporting the functional currency perspective is the assenters view (paragraphs 73, 75, 97, and elsewhere) that a translated functional currency income statement better provides U.S. investors and creditors with information necessary in assessing future cash flows than does an income statement whose components have been measured from a dollar perspective. The dissenting view is that a translated functional currency income statement is inappropriate because it can include items that (a) do not exist for the consolidated enterprise (for example, transaction gains on intercompany trade receivables or monetary items denominated in dollars) or (b) are incorrectly measured (for example, a gain on a holding of a third currency that significantly strengthens against the dollar but only moderately strengthens against the functional currency). It can also exclude items that do exist for the consolidated enterprise (for example, a gain on a monetary asset denominated in a foreign operation s functional currency when that currency strengthens against the dollar). The dissenters see no persuasive reasoning to support the belief that external users want or need to know the amount of transaction gains or losses as measured from the perspective of the manager of the foreign operation (that is, in functional currency), while at the same time wanting a balance sheet that is measured from a dollar perspective a balance sheet that denies the usefulness of the foreign perspective. (The previously referenced examples in the August

13 FAS52 FASB Statement of Standards 1980 Exposure Draft also further illustrate this concern.) Similar Accounting for Similar Circumstances The dissenters believe that the criteria in paragraph 42 for deciding between the Statement 8 translation method and the current rate method are inappropriate (for the reasons set forth in paragraphs of Statement 8). They also believe that application of those criteria will not result in similar accounting for similar situations. Likewise, the absence of effective criteria that would objectively indicate when foreign currency transactions (paragraph 20(a)) and forward exchange contracts (paragraph 21) are hedges creates the possibility that transaction gains or losses that should be reported in net income currently may instead be reported as translation adjustments or deferred as hedges of commitments. The variety of permissible methods of transition from the existing Statement 8 requirements may also Members of the Financial Accounting Standards Board: Appendix A Donald J. Kirk, Chairman Frank E. Block DETERMINATION OF THE FUNCTIONAL CURRENCY John W. March Robert A. Morgan David Mosso 39. An entity s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. The functional currency of an entity is, in principle, a matter of fact. In some cases, the facts will clearly identify the functional currency; in other cases they will not. 40. It is neither possible nor desirable to provide unequivocal criteria to identify the functional currency of foreign entities under all possible facts and circumstances and still fulfill the objectives of foreign currency translation. Arbitrary rules that might dictate the identification of the functional currency in each case would accomplish a degree of superficial uniformity but, in the process, might diminish the relevance and reliability of the resulting information. result in similar circumstances being accounted for differently. Mr. Morgan believes the transition paragraphs should have required that the amount necessary to adjust from the Statement 8 basis to the new basis be reported as the opening translation adjustment in equity for the first year in which the new Statement becomes effective. To restate any year prior to the effective date of this Statement may foster an inappropriate conclusion, namely, that those restated results are the results an entity might have experienced had the new Statement been in effect for earlier periods. There is considerable evidence that many enterprises alter their hedging of foreign exchange exposure depending on the accounting standards currently in effect. Thus, restated financial statements for those entities, whether required or done voluntarily, could not accurately reflect what might have happened had this Statement been in effect. Voluntary restatement also diminishes the comparability of financial reporting among companies. In Mr. Morgan s view, the Board should have prohibited restatement as a method of transition to this new Statement. Robert T. Sprouse Ralph E. Walters 41. The Board has developed, with significant input from its task force and other advisors, the following general guidance on indicators of facts to be considered in identifying the functional currency. In those instances in which the indicators are mixed and the functional currency is not obvious, management s judgment will be required in order to determine the functional currency that most faithfully portrays the economic results of the entity s operations and thereby best achieves the objectives of foreign currency translation set forth in paragraph 4. Management is in the best position to obtain the pertinent facts and weigh their relative importance in determining the functional currency for each operation. It is important to recognize that management s judgment is essential and paramount in this determination, provided only that it is not contradicted by the facts. 42. The salient economic factors set forth below, and possibly others, should be considered both individually and collectively when determining the functional currency. FAS52 12